Housing Data Are Stable. Housing Stocks Are Awfully Hot


I like this.


Mr. Gao co-found and became the CFO at Oxstones Capital Management. Mr. Gao currently serves as a director of Livedeal (Nasdaq: LIVE) and has served as a member of the Audit Committee of Livedeal since January 2012. Prior to establishing Oxstones Capital Management, from June 2008 until July 2010, Mr. Gao was a product owner at Procter and Gamble for its consolidation system and was responsible for the Procter and Gamble’s financial report consolidation process. From May 2007 to May 2008, Mr. Gao was a financial analyst at the Internal Revenue Service’s CFO division. Mr. Gao has a dual major Bachelor of Science degree in Computer Science and Economics from University of Maryland, and an M.B.A. specializing in finance and accounting from Georgetown University’s McDonough School of Business.


Homebuilding stocks continue to reflect the belief that the housing sector is the healthiest it’s been since the recession and that it’s improving further. To that point, two of the top-performing members of the S&P 500 this year are in the housing sector.

Going back to the start of 2012, the builders in general have been trouncing the market’s 6% rise. The SPDR Homebuilders ETF (XHB) is up 46% since the beginning of January, and the Housing Sector (^HGX) index has gained 51%. FactSet data show PulteGroup (PHM) as the best stock on the S&P this year, rising 149% through Tuesday, and Lennar (LEN) at No. 5 with an 83% gain.

This week two builders, D.R. Horton (DHI) and Beazer Homes (BZH), offered quarterly numbers with which both appeared pleased, the former citing continued improvement in housing and the latter calling out its orders, closings and backlog growth as positives. Home Depot (HD), the giant home-improvement-goods chain, followed suit by raising its forecast and saying its third-quarter results were better than expected, in part because of what it views as “the start of the path toward the healing of the housing market.” Home Depot’s shares, now at their highest point since March 2000, have gained 50% in 2012. Competitor Lowe’s (LOW) has advanced 25%.

All of this is terrific news if you’ve owned the shares during the run, but it’s not necessarily so if you’re thinking about purchasing a stock for the first time. With these upward prices and upbeat comments, has buying anywhere in the group gotten too risky, given how much of a run-up has already taken place?

For the moment, this is probably the more contentious part of the debate regarding the state of housing. Even if you believe in a housing recovery, straight lines up easily can lead to investor angst. A pair of recent guests on CNBC discussed this very concern. Nishu Sood of Deutsche Bank took the fundamental side, saying he’s confident housing is still recovering, which is the positive part.

“The critical thing, though, is how much of a pace are investors expecting?” he asks in the piece, the video of which can be seen below. “Clearly, expectations have gotten a little bit ahead of themselves on the pace of volume and pricing recovery, and now we’re seeing a little bit of adjustment in that regard.”

Carter Worth of Oppenheimer brought in the technicals to demonstrate the recent moves in the sector, and what he sees of the homebuilders makes him nervous. “Whatever great news is coming, it’s priced in for now,” he says. “Crowded trade, everyone likes them, and typically that’s when things start to get just that, crowded.”

Healthy Disagreements

Of course, share prices are one just aspect. The bigger issue for the economy and for homeowners isn’t the stocks over the past 10-plus months — it’s whether housing has truly bottomed and is experiencing a legitimate, lasting rebound. The housing situation has been starting arguments since the financial crisis left its worst days behind, and there’s far too steady of an information flow for that to ebb. With new-home sales, existing-home sales, price indexes, foreclosure data, order cancellations, building permits, home starts and so on, every month brings another round of numbers, and with them, the discussion about what it all means.

Determining how housing is doing depends somewhat on the figures you’re using, but this much can be said: It would require digging pretty deep these days to find enough data to convincingly state the sector isn’t showing any signs of improvement. A recent guest on Breakout contended that housing in fact was the big winner of the election — by extension, Federal Reserve Chairman Ben Bernanke and his allies may be, too. While the U.S. central bank is a piece of the housing story, though not the whole story, no housing study can ignore the fact that the Fed has kept rates extraordinarily low for years, and that it recently it embarked on another round of mortgage-backed security purchases.

Again, there are many options for rating the sector, but the builders themselves and three of their key measures — backlog, orders and deliveries — can provide a pretty fair sense of housing’s current direction. The charts below show the tallies for seven publicly traded homebuilders — Pulte, Lennar, D.R. Horton, Beazer, Hovnanian (HOV), KB Home (KBH) and Toll Brothers (TOL) — over the past three years.

Taken together, the charts suggest that, at a minimum, demand isn’t worsening. That’s a long way from a stirring bounceback, but it speaks to what’s had the stocks heading higher and supported the case for stabilization in the sector. Below is the backlog trend for the builders for 12 quarters:

Housing Backlog 2010-2012

Getting a little better, with three straight quarters above 25,000, assuming fourth-quarter estimates prove accurate. What about deliveries, the homes the builders have closed? Here again are the past three years:

Housing Deliveries 2010-2012

The first three quarters of the year fail to match 2010, but this year is on track to show four consecutive increases vs. the comparable periods for 2011, including the strongest showing of all to finish out 2012 above 20,000.

Next are the orders, which reveal combined numbers above 20,000 in the prior two quarters, both marking the only time that’s happened in the survey period. The current fourth quarter, based on expectations, would be around the fourth-best, right in line with the second quarter of 2011.

Housing Orders 2010-2012

If you’re an investor, you have to factor in these numbers when mulling whether this is shaping up as enough of a recovery, with acceptable demand, that would lead you to bet on additional increases for the stocks. Naturally, the trouble with all investments is that no one can see the future. Demand could fall off a cliff again. That’s the risk of being too optimistic. And speaking of cliffs, the fiscal cliff, if not resolved, might put the nation back in a recession, some economy watchers believe. Many Americans are still worried about their jobs and their finances, and a second steep downturn inside of a half decade would unquestionably hit the housing market hard, especially considering a home is by far the most expensive item most regular people will ever buy.

Bubbly Days

In terms of backlog, deliveries and orders, the market of course is nowhere near the levels of the mid-2000s, and that’s probably for the best in most ways. Comparing the last three years with the super-hot period for housing in 2005-2007 shows how far below those peak readings the builders are today. These are the same seven companies shown above (PulteGroup was formed by the 2009 merger of Pulte Homes and Centex, so the earlier trio represents the combined data for the two companies). First, the closings:

Housing Deliveries

Those 2010-2012 numbers are the same as in the previous chart, scaled down to fit the width and in order to include the earlier data. Compared with the peak, the apex for deliveries in the past three years, above 20,000, is around one-quarter the level of the top years. Second, the orders:

Housing Orders

Here again, totals above 20,000 for back-to-back quarters is a far cry from where housing was — the second quarter of 2005 was above 70,000.

Finally, and this one is probably the starkest of all, the backlog data:

Housing Backlog

That’s six straight quarters well above 120,000, from the second quarter of 2005 through the third quarter of 2006. Nowadays, three straight quarters of 25,000 or so is the height.

Hopeful Signs

Patrick Newport, an economist with IHS Global Insight, released a report this week that he says signals another positive development for housing. The homeowner vacancy rate dropped to 1.9% at the close of the third quarter, marking its lowest point in seven years. What that indicates, he says, is that most of the extra construction that came into being during the housing top has been worked through.

“This statistic, which measures the proportion of homes vacant and for sale, is one of the more important housing indicators,” he wrote in summarizing the findings. “It is also one of the more overlooked.”

Newport added that the reading “is one more reason to believe that housing will be one of the economy’s better-performing sectors over the next three years.” Reached by phone to discuss the data further, Newport says that in 2015 he’s looking for a housing starts annual pace of 1.6 million, almost double the 872,000 rate the Commerce Department reported for September.

“We’re not building enough homes,” he says. “The market is extremely depressed still.”

Newport says that, while not all data points are going to be as reliable as others, the vacancy decline shouldn’t be underestimated. “It’s giving us a very good picture of what’s happening to the inventory out there,” he says.

A separate inventory report pointing to a tighter market was released this week on Realtor.com, the official site of the National Association of Realtors. It found that, in October, the number of single-family homes, condos, townhomes and co-ops for sale in the U.S. was at 1.76 million units, a 17% drop from last year. However, lest anyone get too giddy, the site notes that prices aren’t as strong, saying that, though “lower inventories are a good sign, the recent erosion in the median list price may foreshadow a dampening of recent increases in housing prices.”

Is housing back? If by back, the middle of the last decade comes to mind, then no, not even close. But if calmer, steadier days with pockets of expansion are the key measure, then housing is showing a pulse. The stock prices, though, might need more than just a pulse to keep forging higher.


Post a Comment

Your email is never published nor shared. Required fields are marked *


Subscribe without commenting